Unpaid internships pose a litigation risk for employers

As summer approaches,corporations and non-profits around the country are preparing to welcome a new crop of interns. But some companies won’t be greeting any eager young workers this year, and others will scale down their internship programs in order to pay those who do come onboard at minimum wage. That’s because a spate of well-publicized lawsuits has changed what was once viewed as a win-win—free help for employers and resumé-building experience for interns—into yet another litigation risk.

The issue is compliance with the Fair Labor Standards Act (FLSA) and state wage and hour laws, which require employers to pay employees at least the minimum wage. The Department of Labor (DOL) highlighted the issue in a 2010 Fact Sheet, which set out criteria for unpaid internship programs based on a 1947 Supreme Court decision, Walling v. Portland Terminal Co. The criteria boil down to requiring the internship to be designed for the benefit of the intern rather than the company. The DOL said, “Internships in the ‘for-profit’ private sector will most often be viewed as employment” [requiring payment of at least minimum wage and overtime] unless they are “similar to training that would be given in an educational environment.”

Following release of that fact sheet, former interns at Fox Searchlight, Hearst Corp. magazines and Charlie Rose’s talk show all filed class actions, saying they did the work employees would do and did not get a true educational experience. The Fox Searchlight case, which two interns who worked on the movie “Black Swan” originally filed, grew to cover interns in all Fox Entertainment Group divisions. Motions to certify a nationwide collective action and a New York class action are pending, with oral arguments set for May 3 in the Federal District Court for the Southern District of New York.

In July 2012, a judge in the same court granted conditional collective action certification in the Hearst case under the FLSA for what the plaintiffs’ attorneys say is a potential class of 3,000 former magazine interns, and a motion for class certification under New York labor law is pending. Rose and the production company for his PBS show settled a case in December 2012, agreeing to pay up to a total of $250,000 to a potential class of 189 former interns.

Although the plaintiffs bar hasn’t yet generated an avalanche of similar suits, labor and employment attorneys are seeing an uptick in FLSA claims by former unpaid interns.

“It’s the flavor of the month in wage and hour litigation,” says Robert Whitman, a partner at Seyfarth Shaw. “So many of the other battles have already been fought [such as misclassifying employees as exempt] that the plaintiffs’ attorneys are looking for new theories to pursue. It’s certainly something we on the defense side are thinking more about now that we have seen a few high-profile cases get filed, litigated and settled.”

Branching Out

Although media attention has focused on the large class actions targeting big-name media companies, intern complaints against employers in other industries and from individuals and small groups have started to pop up.

“Any employer who uses unpaid interns would be subject to scrutiny,” says David Woodard, a partner at Poyner Spruill.

In February, a former unpaid intern sued Elite Model Management, a leading New York modeling agency, seeking class certification and at least $50 million in unpaid wages, overtime and benefits. “Elite has for years boosted its bottom line on the backs of young interns who, while anxious to build their resumes, are too afraid to ask for compensation,” the complaint alleged.

Taking a different tack, a former Hamilton College “intern/assistant football coach” who received a stipend for his work filed suit in December 2012, saying the $1,000 monthly stipend amounted to less than $3 per hour during the football season when he worked more than 100 hours per week. He alleged that even during the offseason, his compensation fell below the minimum wage.

As the cases continue to mount, how courts will view them remains an open question. An unpublished decision out of the 11th Circuit in January, Kaplan v. Code Blue Coding and Billing, suggests that programs for which students receive academic credit may pass muster in that circuit. In that case, students lost a suit against employers who provided them with externships required for graduation.

But John Thompson, a Fisher & Phillips partner, notes that such cases are fact-specific, and though intern programs that confer academic credit may be easier to defend as educational, that factor alone does not assure an unpaid internship will escape litigation.

“If the school is willing to give credit without overseeing what actually happens during the internship, they don’t know if the person is participating in classroom instruction or cleaning the restrooms,” he says. In such a case, it would be difficult to meet the educational requirements for an unpaid internship, he says.

Avoiding Risk

In light of the litigation and uncertainty as to what constitutes a legitimate unpaid intern program, Thompson says some employers are ending their programs altogether. “A number of organizations are saying, ‘Look, if I am going to be vulnerable to claims based on standards that are so vague and ambiguous that they are not standards at all, I will pass. I am not going to worry about whether some mid-level manager says ‘get me some coffee’ and all of a sudden I have a lawsuit on my hands.’”

Of course, another option is to bite the bullet and pay interns minimum wage and overtime.

“Unless you are really, really sure your intern program would pass muster, just go ahead and pay minimum wage and overtime,” Woodard says. “That’s the safest thing to do.”

Employers who want to retain unpaid intern programs must make sure they are teaching a skill rather than using the intern for menial tasks, and the skill should be transferable to other employers in the industry, Woodard says. At the same time, the intern should not do too much hands-on work but rather should shadow someone and primarily learn by observation.

Although not fail-safe, finding an intern through an educational institution that offers credit and oversight is also advisable, he adds.

Finally, make sure the intern isn’t dong work that a regular employee would otherwise handle.

“An ad that says ‘we need an intern’ is a danger signal,” Thompson says. “That means, ‘we have work we don’t want to pay for, so we are looking for a free worker.’ The minute that mindset is developed, you know you’ve got trouble.”